Netting Passes Senate, Part of Controversial
Bankruptcy Reform

December 11, 2000 (HedgeWorld.com)-The U.S. Senate
Thursday passed a bankruptcy reform bill that contains
protections for contract netting in the event of the
insolvency of a large financial institution, a matter of
potential importance to the alternative investing
community.

The House passed the same bill in October. The bill next
goes to President Clinton, who has threatened to veto
it.

It is generally accepted in Washington that
financial-netting reform is needed. A financial institution
can have several contracts pending with the same
counter-party, requiring regularly scheduled cash
settlements in both directions. In such instances, the
parties frequently net out the impact of the entire set of
contracts instead of treating each as a separate deal. As a
result, net liability on each side is far less than the
paper value.

The financial-netting provisions of the Senate bill
would deny an automatic stay to set-offs under swap or
netting agreements, and would restrict the authority of a
bankruptcy trustee in regard to such transfers. There is
some concern that, in the absence such provisions, the
insolvency of a large financial institution and its effort
to renege on swaps and netting agreements could cause a
liquidity crisis in the world financial system.

When the House passed this bill, Dick Peterson, aide to
John LaFalce, D-N.Y., suggested that Republicans were using
the netting issue as leverage to avoid a veto of the rest
of the bankruptcy package.

“Financial netting reform should definitely be done,”
said Mr. Peterson. “We’ve been trying to get it through for
two Congresses now.”

The most controversial features of the bill concern
consumer bankruptcies. Critics point to what they see as
rampant abuse and argue that this bill would require
debtors to do more than simply dissolving their debts.
Opponents, notably Sen. Paul Wellstone, D-Minn., argue that
the bill is too harsh on debtors and gives an indirect
subsidy to credit card companies.

The bill passed the Senate by a veto-proof majority, 70
to 28. But the House passed it on a voice vote, making the
margin uncertain. However, the House last year passed a
somewhat different version of the bill on a roll call vote
of 313 to 108, which would be enough for an override.

The president has another option: a “pocket veto.” He
could simply leave the bill unsigned, and if Congress
adjourns within 10 days (excluding Sundays), the bill
fails.

Even if the lame-duck Congress stays in session long
enough to prevent a pocket veto, i.e. until Dec. 20, and
forces Clinton to employ a more explicit veto, the large
margin of passage may not hold upon reconsideration.

With such a consensus for financial-netting reform,
could it be detached from the more controversial measures?
The House of Representatives passed such a bill in three
contexts this year – as a stand-alone bill, as part of the
Commodity Futures Modernization Act, and as part of the
bankruptcy package. Christi Harlan, an aide for the Senate
Banking Committee, said Friday that she does not expect the
Senate to enact the financial-netting provisions as a
separate bill. But she does expect that the Senate will
address commodity futures modernization, perhaps attaching
it as a rider to a pending appropriations bill.

The best chance for passage of financial-netting reform
this year seems to be as a rider on a rider.